You can check to see how your representatives voted. Both Senators in my State voted for it. My local Congressman, remarkably, was one of only 16 Democrats to vote against the bill. On his Congressional web site he called the deal “yet another short-term, Band-Aid solution“.

House Speaker John Boehner quietly voted for the bill, as did Republican Paul Ryan. House Minority Leader Eric Cantor voted against it.

Avoiding the Fiscal Cliff

Did the Biden/McConnell deal get the job done?

The only way to know for sure is to compare the New Year’s Day deal with the CBO definition of the fiscal cliff.

The CBO said if breached, the fiscal cliff would reduce GDP by -1.3% the first half of this year and send the U.S. economy back into recession.

According to the CBO, as near as can be surmised, here are the tax hikes and spending cuts that came out of the New Year’s deal…

CBO Quantifies Biden/McConnell Fiscal Cliff Deal:

$207 Billion: Title 1 – General Extensions

Middle class tax cuts below the $400K income limit

Alternative Minimum Tax Adjustment

Estate Tax Rate set to 40%

Capital Gains Rate Increased to 20%

$6 Billion: Title 2 – Individual Tax Extensions (new)

Discharge of principle residence indebtedness

Tuition and tuition related expenses

Tax-free retirement fund charitable contributions

Many Others

$63 Billion: Title 3 – Business Tax Extensions (new)

Many, many unrelated new expenses

$5 Billion: Title 4 – Energy Tax Extensions (new)

2 or 3 vehicle credit

cellulosic biofuel producer credit

biodiesel fuel incentives

Others

$22 Billion: Title 5 – Unemployment Benfits (new)

$13 Billion: Title 6 – Medicare “Doc Fix”

$14 Billion: Title 9 – Budget Provisions

Undefined Pay-as-you-go (PAYGO) scorecard cost

TOTAL = $330 Billion

At first glance it appears that a little over half of the tax hikes and spending cuts needed to avoid recession were reversed. However, such is not the case.

There are four major new spending items totaling $96 billion added into the new law. That reduces its recession fighting potential to only $234 billion dollars of the original $607 billion the CBO identified.

In other words, the new law reduces the chances of another recession by about 1/3rd!

The $74 Billion Boondoggle

$74 billion of the new spending added to the deal are in the Title 2, 3 and 4 sections of the law. They contain long laundry lists currying political favors and vote buying:

The remaining $22 billion in the $96B in new spending is for a one year extension in unemployment benefits.

The Sequestration Switch

The most telling thing of all in the new law is that it delays implementation of sequestration for two months.

In other words, we got $96B in new spending, yet the only spending cuts in the fiscal cliff were stopped cold.

A delay in sequestration is a smokescreens. It folds it into the middle of yet another debt ceiling debate in a few weeks. That cleverly allows the politicians to have a “do over” when it comes to raising the debt ceiling. They can pull the old Washington two-step and fold sequestration into one of it’s famous mega-trillion dollar spending cut “grand bargains”, which don’t really cut spending at all!!

Congress will quietly disappear sequestration spending cuts into the next debt deal.

Conclusions

Everyone is happy. World equity markets are up into the stratosphere today. The President is happy. Vice President Joe Biden is a hero. Congress is ecstatic that they temporarily overcame their own ineffectiveness.

The deal has a positive outcome… it clarifies the future tax situation by making most of the Bush-era tax cuts permanent and ties other items to the rate of inflation as they should be. The new law even got the endorsement of the much-hated tax villain, Grover Norquist!

Pull off the covers, though, and the fiscal cliff deal hammered out in the middle of the night on New Year’s Eve comes up short.

The new law only reduces the fiscal cliff recession threat by 1/3rd and it contains $96 billion in new, mostly unfunded spending. Much of the new spending is for boondoggles to curry political favors.

It delays the start of sequestration two months in an obvious political maneuver to squelch it complete and fold it into future debt talks.

At the bottom line, though, this new law creates an entirely new problem… a $3.9 trillion budget shortfall over the next 10 years!

Go it. There is still plenty of fiscal drag left. That means when the next cliffs on debt ceilings and budget cuts come up, 2013 is going to be an austerity type of year on fiscal policy. This would fit with a political business cycle theory where the first years of a President’s term suck, and then the juice is pumped in for the election.

We hear a lot of talk about austerity or no austerity as if we have a choice in the matter; that we can equally chose one or the other.

We are approaching the time when there isn’t a choice… that time will be upon us when servicing the national debt becomes the biggest expense in the federal government’s budget. We could get there as early as the end of Obama’s 2nd term.

No “grand bargain” that the current government is likely to come up can prevent it within the short time needed.